4.5.2.2 Accounting rules as a reflection of ‘commercial and economic reality’

Having compared the accounting rules for determining whether a supply is made for consideration as described in Section 4.1.2.3 with the EU VAT rules that should be applied for that purpose (as described in Section 4.2), I will now compare the EU VAT rules relevant for deciding whether all element of a composite supply are supplied for consideration (as described in Section 4.5.2.1) with the accounting rules that are relevant for this purpose.

Above, in Section 4.1.2, I explained why the accounting rules, and more specifically the rules regarding ‘revenue recognition’, can be useful for interpreting EU VAT rules regarding the VAT treatment of composite supplies. However, the proposed accounting rules regarding revenue recognition seem to steer away from the way multiple-element transactions are looked at from an EU VAT perspective. Under the proposed rules for revenue recognition, revenue should be allocated to each separate performance obligation. This implies that this should also be the case for ‘performance obligations’ that are advertised as ‘free elements’ to a multiple-element supply, which is different from the ‘main’ VAT rule described above.

Upon closer inspection, however, the fact that, under the proposed rules, revenue is allocated to all agreed performance obligations is based on practical grounds rather than rule based (avoiding discussions about how to identify the ‘main’ goods or services for which the customer has contracted or whether an element qualifies as a ‘performance obligation’ or rather as a ‘marketing incentives’, also keeping in mind that the outcome of that assessment could vary significantly depending on whether it is made from the perspective of the business model of the performing entity or from the perspective of the customer).1 To me, this means that existing accounting rules that are actually ‘rule based’ may still provide relevant guidance, since they, rather than being broadly applicable and practicable, more accurately reflect commercial and economic reality. I will first briefly describe the proposed rules, and then describe the current rules, similar to how I did this in Sections 4.1.2.4 above.